In my thesis I investigate different aspects of the interlinkage between the sovereign risk of default and financial stress. First, I analyze the vicious circle between the financial health of governments and banks, during the European crisis in the late 2000s. I use panel data from ten Euro Area countries over the period 2004-2013. I adopt the narrative approach to compile a timeline of exogenous sovereign shocks that I use as instruments in a TSLS regression to estimate the effect of sovereign CDS spreads on banking CDS spreads. I find that shocks to sovereign CDS spreads significantly increase the banking CDS spreads only in Periphery countries during the financial crisis. I continue my study analyzing in more depth two different channels of transmission of sovereign risk to the banks within the Euro Area, a direct and an indirect one. I find both direct and indirect spillovers between Euro Area countries from sovereigns to banks during the European crisis, but the direct channel has a stronger and more significant effect. The indirect channel shows significant effects only in the case of Core countries. Finally, I explore the effects of financial stress on the probability of default of Market Access countries. I estimate a probit model using panel data from 117 countries over the period 1990-2014 to examine the impact of financial stress and macroeconomic fundamentals on the probability of sovereign default. I find that the marginal impact of currency reserves on the probability of default is significantly higher for countries hit by a global financial shock, while debt sustainability indicators show non-linear effects in countries hit by a domestic banking crisis.